AQA A-level Economics: The National Minimum Wage and discrimination in labour markets (7136) – Revision Notes

These notes condense two parts of the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), first taught from September 2015: The National Minimum Wage (3.1.6.6) and Discrimination in the labour market (3.1.6.7). The combined PDF prints the A-level versions as 4.1.6.6 and 4.1.6.7. All figures are invented and illustrative.

For full explanations, read the study guide, then test yourself with the practice questions. The course hub is AQA A-level Economics, the printable checklist tracks progress, and the free 10-minute diagnostics find weak spots.

Key definitions

Term	Meaning
National minimum wage	The legal lowest hourly wage an employer may pay; acts as a price floor
Marginal revenue product (MRP)	Revenue added by the last worker hired
Marginal cost of labour	Extra cost of employing one more worker; above the wage under monopsony
Wage discrimination	Different pay for workers of equal productivity in the same job, because of group membership
Occupational segregation	A group concentrated in particular, often lower-paid, occupations
Statistical discrimination	Judging an individual by the average of their group
Pay gap	(Average pay of group 1 − average pay of group 2) ÷ average pay of group 1

NMW: the two models

Competitive market (floor above equilibrium)

1. Draw wage against labour, with demand and supply.
2. Draw the floor above equilibrium.
3. Employment is on the demand curve, labour willing to work on the supply curve.
4. Excess supply is unemployment. Fewer jobs, but employed workers earn more.

Worked reminder (invented): demand L = 1,480 − 60w, supply L = 125w, so the equilibrium is cr 8 and 1,000. A floor of cr 9 gives employment 940, supply 1,125 and excess supply 185. Wage up 12.5%, jobs down 6%, elasticity of demand for labour −0.48, wage bill up from cr 8,000 to cr 8,460.

Monopsony (employer sets a wage below MRP)

1. Employer hires where MRP equals marginal cost of labour, giving a low wage and low employment.
2. A floor makes the wage the marginal cost up to the point where supply meets the floor.
3. Employment rises if the floor is between the monopsony wage and the competitive wage.
4. Above the competitive wage, employment falls as in the competitive model.

Worked reminder: supply w = 4 + 0.004L, MRP = 16 − 0.004L. Unregulated: 1,000 workers at cr 8. Competitive benchmark: 1,500 at cr 10. Floor of cr 10 gives 1,500; cr 12 brings employment back to 1,000.

NMW: effects at a glance

Effect	Chain
Employment	Wage up → labour demand contracts along the curve (competitive) or rises (monopsony, floor below the competitive wage)
Prices	Unit costs up → prices up if firms can pass costs on → cost-push pressure
Productivity	Better pay → motivation up, turnover down → output per hour up
Substitution	Labour dearer → capital or skilled workers replace low-skilled
Poverty	Helps low-paid in poor households; misses poor households with no job; helps some who are not poor
Government	Tax receipts up, in-work benefit cost down; fewer jobs raises benefit cost
Inequality	Pay gap between lowest and median falls
Differentials	Higher paid may demand increases to restore gap

Advantages: higher incomes for the lowest paid; better work incentives; possible job gains under monopsony; productivity gains; lower reliance on benefits. Disadvantages: possible unemployment, especially young and low-skilled; higher costs and prices; poor targeting; reduced hours or training; evasion; competitiveness.

NMW: evaluation checklist

• Size of the floor against typical earnings
• Elasticity of demand for labour: the more elastic, the greater the job loss
• Degree of monopsony power in the sector
• Productivity response of workers and firms
• Time: firms may adjust prices, hours or technology slowly
• Whose view: employed, displaced, employer, consumer, taxpayer
• Real-world facts you may quote: UK NMW introduced in 1999, with different rates for different age bands and advice from the Low Pay Commission

Wage discrimination: conditions

1. Employer has market power over wages (monopsony or wage setting).
2. Groups can be identified and kept apart (pay secrecy, no resale).
3. Groups differ in the elasticity of labour supply; the less elastic group is paid less.
4. Barriers to mobility (caring duties, location, information, recognition of qualifications).
5. Prejudice or statistical discrimination, weak enforcement.

Worked reminder (invented): MRP = 30 for both groups. X supply w = 12 + 0.1L; Y supply w = 6 + 0.3L. Marginal cost is 12 + 0.2L and 6 + 0.6L. Employment is 90 and 40, wages 21 and 18, supply elasticities 2.33 and 1.5. The pay gap is 3 ÷ 21 = 14.3%. The competitive outcome would be 180 and 80 at cr 30.

Impact of discrimination

On	Effect
Wages	Lower pay for equal productivity; gap that is unexplained by job, hours and experience
Employment levels	Fewer jobs and higher unemployment or inactivity for the affected group
Types of employment	Occupational segregation, glass ceiling, part-time and insecure work, overqualification

Groups: gender (pay gaps, caring roles), ethnicity (lower pay and callback rates for equal qualifications), other (age, disability, religion). Real-world fact: the UK Equality Act 2010 prohibits discrimination on protected characteristics, and larger employers in Great Britain must publish gender pay gap figures.

Explained versus unexplained: mean pay men 20, women 17, gap 15%. Women in the same grade and hours earn 19, so the like-for-like gap is 5% and two-thirds is explained. Unexplained does not equal proven discrimination.

Wage discrimination: who gains and loses

	Advantages	Disadvantages
Workers	Favoured group paid more	Others lose pay, jobs, training and morale
Employers	Lower costs, higher profit	Legal risk, reputation, lost talent
Economy	Perfect discrimination can match competitive employment	Misallocated talent, lower output, inequality

Evaluation: short-run employer gains versus long-run losses; strength of law; how competitive the market is.

Calculation methods

Task	Steps
Effect of a floor (competitive)	Solve demand = supply for the equilibrium; put the floor into each equation; employment is the smaller figure, the difference is excess supply
Elasticity of demand for labour	Percentage change in employment ÷ percentage change in wage
Wage bill	Wage × employment, before and after; compare the percentage change
Monopsony equilibrium	Write the marginal cost of labour (double the supply slope); set equal to MRP; read the wage from supply
Cost of an NMW rise	Share of costs paid at the minimum × percentage rise; add any ripple effects
Pay gap	(Higher − lower) ÷ higher; recalculate on like-for-like pay to find the explained share

Diagram sketch in words

Competitive floor: wage on the vertical axis, labour on the horizontal. Downward demand, upward supply, crossing at the equilibrium. A horizontal line above it is the floor. Mark employment on demand, labour supplied on supply, and shade the gap as excess supply.

Monopsony floor: add the marginal cost curve above supply and the MRP curve. The unregulated outcome is where marginal cost meets MRP. With a floor, the marginal cost is flat at the floor until supply reaches it, so the new equilibrium is higher and to the right.

Must-know distinctions

• Unemployment from a floor = labour supplied minus labour demanded, not only jobs lost.
• Competitive floor: employment falls. Monopsony floor: employment may rise, then fall.
• Pay difference is not the same as discrimination.
• Discrimination is a market-power outcome, while prejudice alone in a competitive market is competed away.

Quick self-test

1. In a competitive market, demand is L = 900 − 30w and supply L = 60w. Find the equilibrium.
2. A floor of 12 is set. Find employment, labour supplied and excess supply.
3. Percentage change in the wage bill if the equilibrium wage is 10 and employment 600 originally and employment becomes 540 at the floor of 12?
4. A firm spends 20% of costs on minimum wage staff. The NMW rises 8%. By how much do total costs rise, ignoring ripples?
5. A monopsonist faces supply w = 2 + 0.01L and MRP = 14 − 0.01L. Find employment and the wage.
6. Find the competitive employment and wage for question 5.
7. State two conditions for wage discrimination.
8. Mean pay of group A is 15 and group B is 12. Find the pay gap.
9. State one reason why a minimum wage may raise productivity.
10. Explain what occupational segregation is.

Answers

1. 900 − 30w = 60w, so w = 10 and L = 600.
2. Employment 900 − 360 = 540; supplied 720; excess supply 180.
3. Bill 6,000 becomes 12 × 540 = 6,480: up 8%.
4. 20% × 8% = 1.6%.
5. MC = 2 + 0.02L; 12 = 0.03L, so L = 400; wage 2 + 4 = 6.
6. 12 = 0.02L, so L = 600; wage 8.
7. Any two: monopsony power; separable groups; differing supply elasticities; immobility; prejudice.
8. 3 ÷ 15 = 20%.
9. Higher motivation, lower turnover or better retention, or training investment.
10. A group is concentrated in particular occupations, often lower paid.

Where marks are usually lost

• Describing unemployment but not stating who is better off and who is worse off.
• Using the competitive diagram for a question about monopsony.
• Giving a floor result without a number or reference to the diagram’s labelled points.
• Calling every pay gap discrimination.
• Listing effects without chains of reasoning from cause to consequence.
• Evaluating with no judgement or without saying what it depends on.
• Forgetting that wage discrimination needs market power.
• Quoting real-world statistics from memory instead of using facts you are sure of.

Official syllabus

AQA AS and A-level Economics specification (7135 and 7136), first teaching from September 2015, version 1.3, published by AQA. Sections 4.1.6.6 and 4.1.6.7.